Pay Off House or Invest in New MultiFamily Property

[Sam Harper]

Greetings BP,

Glad to have been introduced to this community over the last month. I am coming from a classic Dave Ramsey mentality of paying off your house in full before moving on to other real estate investments. 

I am about three years away from paying off my primary residence through a savings plan of money I'm making from my job/side hustles.  Understanding that it can depend on the deal that may be available I wanted to see if anyone else had any thoughts on paying off their primary residence (which in my case would free up about $650/mo in cashflow) or investing in a rental property that would begin growing equity and have a little bit of cash flow.

Any feedback would be appreciated as this is my first go.

Thanks!

[Jacob K.]

Hi @Sam Harper, and welcome to BP!

I think it all comes down to your comfort level on what you'd like to do. It also depends on whether or not you are comfortable moving somewhere else if it were advantageous for your investing career to potentially reduce your personal cost of housing.

If you're comfortable with leverage, then you should consider looking into a rental property. You should learn about the different advantages for real estate investing (loan paydown, appreciation, tax benefits, cash flow). As for where to start, I would start by reading the BP forums, listen to BP podcast episodes and check out the beginner's guide here: https://www.biggerpockets.com/real-estate-investin...

In my opinion, his methodology is helpful to people who have a lot of consumer debt (credit cards, personal loans, etc), but not all that applicable to real estate investors. 

[Doug Shapiro]

Hi Sam,

I am a big fan of leverage.  You should try to keep as much of your own cash as you can.  I know the real answer to your question is much more complicated than this, but hopefully this explanation helps:

When you pay down the loan balance of your property faster than the loan term, this saves you a lot of loan interest payments.  However, you tie up your cash in the property and lose the mortgage interest tax advantage.  Also, depending on your loan interest rate, it may be very much in your best interest to not pay down your mortgage because maybe you have a great interest rate and can earn a higher return by investing in something else. 

I've actually thought about your question for years because I have a similar situation.  I ultimately decided to not pay down any loan faster than I needed to because it would reduce my rate of return for the investment and tie up my cash.  Although you may end up having more monthly cash flow, your return on your investment actually decreases.  That cash would be better put to use investing in something else that has a higher return.  

[Anthony Wick]

I've read Dave Ramsey. I like Dave Ramsey. To a certain point. I think his methodology is as much human nature as it is financial. Human nature shows us that most people cannot handle debt. It will continue to build until it ruins them. Hence the $1 tril in credit card debt and the $1 tril in student loan debt, and the fact that  a great majority of people in the U.S. could not pay for an unexpected $500 car repair today. 

However, I also strongly believe in good debt. As in, if a bank will loan me money at 4% over a 30 year period, I will take every penny I can get and invest it in....well, lots of things. My personal investments have averaged 10-14% over the past 9 years. Even when I lost 30% in 2008 in the markets, 2009-2010 gained 50%. 

Personally, I would invest in long term buy and hold rentals rather than paying off my personal house. As a matter of fact, that's exactly what I am doing. But mindset sometimes takes precedence over dollars and cents. Some people would sleep very soundly at night and be their happiest to pay off their mortgage. And those people are not wrong to do what is best for them. 

[Ali Boone]

I think it's an easy answer if you just look at the numbers. Compare them for each scenario and see where you get more return.

For instance, if the rate of return you get on the investment property is higher than the interest you are paying on the mortgage, the investment property is the way to go. And vice versa- if you can't get a higher % return on the investment property than you are paying on the house, it's better to pay the house off.

Hope that helps.

[David Cruice]

@Jacob K. is spot on: "[Ramsey's] methodology is helpful to people who have a lot of consumer debt (credit cards, personal loans, etc), but not all that applicable to real estate investors". (Q) What's going to be your return-on-equity once you've paid off your house? (A) 0%! You have all that money sitting there doing nothing. Better to set yourself up with a HELOC use it for down payments on investment properties. You can then use the new cash flow to pay down your HELOC (should you so choose).

[Sam Harper]

Thanks everyone for the input. Greatly appreciated.

The HELOC route is probably what I will end up going with. Thank you!